Dodd-Frank Reality Check: What is its true impact on Manufactured Housing?

Those who follow this blog and our www.MHMSM.com trade journal know that we are pro-Industry, solution oriented and believe in the present and future potential of our business. There are those who are profitable and are making money. That means others can be profitable, too.

We also believe in facing realities squarely. Neither holding one’s head in the sand, nor seeing sunshine when it is raining makes good sense. This blog post will focus on Dodd-Frank (DF) reviews, candid insights provided to MHMSM.com by Industry pros, and ask some tough questions to provoke thought.

We hope for the best, and will support all reasonable efforts at a proper resolution. But we must also look at the facts and ask those hard questions.

Because behind the scenes, MH pros say DF’s effects could get ugly for manufacturers, retailers, community operators and all who do business with them if we do not act rapidly in the political arena to amend Dodd-Frank.

Why?

After reviewing the facts and asking the questions below, we will let YOU answer that question for yourself.

With those disclaimers, let us begin with this briefing.

Let’s start with some facts.

1) According to MH chattel lenders, some of the triggers in Dodd-Frank (DF) as it stands today include:

A) high interest rate loans and

B) high risk loans.

2) DF regulatory requirements will add costs to a sale that must be borne by someone. One example given to me was for those who may get qualified for financing on a “high risk” loan. A counseling session will have to be attended before the loan is closed. Some say that counseling session could cost $475 -$600 per loan approval.

The counseling session will have to be scheduled, which could take time (example, 2-4 weeks). The class must be given by someone whose qualifications are approved by the government.

2a) How many will take the counseling session and not close?

2b) Then imagine a counseling session that costs $475 on say a used MH home loan for $20,000.

2c) Who pays if the loan does not close?

2d) Will consumers who may struggle to come up with a 10% down payment be able to afford this added cost?

2e) Will retailers who are struggling want to shoulder that added cost for a counseling session?

3) There are other examples of regulations that will add costs. While estimates vary on the additional cost per loan for Dodd-Frank’s implementation, the common one used is about $4,000 per loan. Under the high cost rule, a lender is allowed to charge only 6% of the amount financed in closing costs. Given that the existing (pre Dodd-Frank) costs run around $750.00 to originate a loan, the fixed transactional costs will run around $4,700.00 per loan. This is one reason why chattel (personal property or ‘home only’ loan) lenders say this will cut off financing on personal property loans under $78,000.

Beyond the costs of the loans themselves are the consequences of losing perhaps half of the home-only financing that currently exists at an already depressed level.

3) What would happen to the value of new and resale homes that could not obtain financing?

4) What would happen to the value of manufactured home communities (or factories, retailer centers, etc.) if Dodd-Frank gets implemented without amendment?

5) How many businesses would close?

6) How many jobs would be lost? (Example, one estimate is 20,000+ jobs, plus the economic ripple effect on others caused by the loss of those jobs).

Now as business owners, managers, contractors or employees, it is natural to think about yourself and how this can hurt you.

But think about the impact on manufactured home owners. Millions of manufactured home owners could be punished by the unintended consequences of this law.

Look at statistics on MHVillage, which indicates the average sales price on all homes sold there since May 27, 2011 is $33,338.73. When financing on a big-ticket item dries up, prices fall. That is an economic fact of life. Millions of manufactured home owners could watch their home values drop sharply, yet again.

Another one of the elephants in the room relates to our industry’s personal property lenders.

Will MH personal property finance companies stay in manufactured housing lending if a big bite is taken out of their loan volume?

Some say, no. They may have to phase out their operations as a result. So not just ‘high cost’ or ‘high risk’ loans will be impacted, but it is conceivable that some lenders will pull out.

If you do not like financing as it stands today, doing nothing to change Dodd-Frank will no doubt make matters far worse.

There are those pros who behind the scenes say there is no way to understate the impact this has on our Industry.

Some quietly speculate that the announced sale of a large part of Hometown America to Equity Lifestyles is due to the growing regulatory challenges this industry faces. As Marty Lavin stated in Industry Voices previously, will rentals save MHC’s? It may buy time for some operators, but for many it will not save their skins over time.

The Manufactured Housing Institute (MHI) has stated it could take 18-30 months before rule making gets implemented by the Consumer Finance Protection Bureau (CFPB). The truth is it could also happen sooner.

The point?

There is no time to waste.

MHMSM.com has been told that a bill has not yet been submitted due to tactical/timing reasons. But the CFPB opens its doors officially on July 21, 2011.

The clock is ticking.

That outlines the challenges.

What can you and I do to help avert these high impact problems?

First, this can be seen as critical a time as the industry has ever faced. This is not hype; it is stone cold reality if nothing is done. So if you are not active in one or more associations, this is the time to become active. They need you and you need them.

Next, as a well known MHC personality has said privately, we need our residents and customers now more than ever. They also need us more than ever. This is the time for positive outreach. This is the time for mending fences if they need mending. Floods and disasters can bring people together, even those who have distrusted one another. This could be a good opportunity for manufactured home businesses along with HUD Code and pre-Code ‘mobile home’ owners to come together. That could become a powerful force at election time.

Next, and without delay, contact the key players in both parties in the House and Senate.

Wikipedia says:

The United States House Committee on Financial Services (also referred to as the House Banking Committee) is the committee of the United States House of Representatives that oversees the entire financial services industry, including the securities, insurance, banking, and housing industries.

Current members, 112th Congress:

Majority (Republican)

Spencer Bachus, Alabama, Chairman

Peter T. King, New York

Ed Royce, California

Frank Lucas, Oklahoma

Ron Paul, Texas

Donald A. Manzullo, Illinois

Walter B. Jones, North Carolina

Judy Biggert, Illinois

Gary Miller, California

Shelley Moore Capito, West Virginia

Jeb Hensarling, Texas, Vice Chair

Scott Garrett, New Jersey

Randy Neugebauer, Texas

Patrick McHenry, North Carolina

John Campbell, California

Michele Bachmann, Minnesota

Thaddeus McCotter, Michigan

Kevin McCarthy, California

Steve Pearce, New Mexico

Bill Posey, Florida

Mike Fitzpatrick, Pennsylvania

Lynn Westmoreland, Georgia

Blaine Luetkemeyer, Missouri

Bill Huizenga, Michigan

Sean Duffy, Wisconsin

Nan Hayworth, New York

Jim Renacci, Ohio

Robert Hurt, Virginia

Robert Dold, Illinois

David Schweikert, Arizona

Michael Grimm, New York

Quico Canseco, Texas

Steve Stivers, Ohio

Stephen Fincher, Tennessee

Minority (Democrat)

Barney Frank, Massachusetts, Ranking Member

Maxine Waters, California

Carolyn B. Maloney, New York

Luis Gutierrez, Illinois

Nydia Velázquez, New York

Mel Watt, North Carolina

Gary Ackerman, New York

Brad Sherman, California

Gregory W. Meeks, New York

Michael Capuano, Massachusetts

Ruben Hinojosa, Texas

William Clay, Jr., Missouri

Carolyn McCarthy, New York

Joe Baca, California

Stephen Lynch, Massachusetts

Brad Miller, North Carolina

David Scott, Georgia

Al Green, Texas

Emanuel Cleaver, Missouri

Gwen Moore, Wisconsin

Keith Ellison, Minnesota

Ed Perlmutter, Colorado

Joe Donnelly, Indiana

André Carson, Indiana

Jim Himes, Connecticut

Gary Peters, Michigan

John Carney, Delaware

Wikipedia further states that:

The United States Senate Committee on Banking, Housing, and Urban Affairs (formerly the Committee on Banking and Currency) has jurisdiction over matters related to: banks and banking, price controls, deposit insurance, export promotion and controls, federal monetary policy, financial aid to commerce and industry, issuance of redemption of notes, currency and coinage, public and private housing, urban development and mass transit, and government contracts.

Members, 112th Congress

The Committee is chaired by Democrat Tim Johnson of South Dakota, and the Ranking Member is Republican Richard Shelby of Alabama.

Majority (Democrat)

Tim Johnson, South Dakota, Chairman

Jack Reed, Rhode Island

Chuck Schumer, New York

Bob Menendez, New Jersey

Daniel Akaka, Hawaii

Sherrod Brown, Ohio

Jon Tester, Montana

Herb Kohl, Wisconsin

Mark Warner, Virginia

Jeff Merkley, Oregon

Michael Bennet, Colorado

Kay Hagan, North Carolina

Minority (Republican)

Richard Shelby, Alabama, Ranking Member

Mike Crapo, Idaho

Bob Corker, Tennessee

Jim DeMint, South Carolina

David Vitter, Louisiana

Mike Johanns, Nebraska

Pat Toomey, Pennsylvania

Mark Kirk, Illinois

Jerry Moran, Kansas

Roger Wicker, Mississippi

If you live in a state/district with one or more of these members, it would be wise to contact your state association, community association and/or MHI for guidance on talking points to line up support. It can make sense to schedule a meeting with a group of people, including home owners, when possible. But some type of meeting is better than no meeting. Writing is better than not writing.

If you are a MHARR member, you should contact MHARR to discuss their position on Dodd-Frank. Your factory’s open doors hang in the balance.

Part of the challenge of Dodd-Frank is a polarized Congress. We need a bi-partisan effort. Make sure your law maker understands that fact.

Now let me tell you what pros tell me about lobbying.

Learn the talking points and express them from the heart. Lobbyists say, for example, that a number of form letters have some impact. But form letters do not have as much impact as a personalized letter will or that a meeting with a legislator and/or their staff can. So whoever is your best writer, have that person draft the letter based on your associations’ input plus your own considered experiences.

Okay, with all that said, if you are a retailer or community operator, factory, vendor or supplier, what should you do?

Beyond taking strong political and association action, you need your own backup plan.

As a business owner or executive, I would try to sell as many homes, and fill as many vacant sites right now as I possibly could. This is not the time for low results or excuses. Pay for good help if you need it. If you need assistance in enhancing your marketing and selling, please give me a call at 847-730-3692.

There are those who say that if Dodd-Frank gets implemented, it could kill a sizable part of what is left of manufactured housing.

Independents will likely suffer first. The majors and strongest independents could survive. Those with deep pockets will no doubt profit over time, as they buy assets after they have fallen in value.

We should not wait to find out if the rich get richer, sometime after the dust settles. Take steps NOW to boost your sales, occupancy and bottom line results. Grow your market share NOW, because some will regrettably do nothing.

Henry Ford, who weathered his own storms, wisely said:

“The man who stops advertising to save money is like the man who stops the clock to save time.”

If DF goes into effect un-amended, some could shift to higher-end HUD Code, modular or other factory-built home sales. Other strategies exist as well, that experts could guide you into.

An interesting piece Tony, but the destructive effect of Dodd-Frank has been apparent from long before it became law. Couple that with SAFE and other “got cha’s” likely to happen, and “The Train to Oblivion” is on the fast track. Lets review some facts which need thought and action.

Lets start with a concept many seem unable to grasp: the Feds knew full well how this would affect MH, and the crafting of the law seems far too directed to be pure chance. Note the counseling, fee restriction, and sales price restriction. Really think this was geared to McRanches in Neveda?

And why have we become the obvious target of the Feds and others? (See the above law, the ever-tightening zoning, and the complete uselessness of Title I, from the industry’s perspective). Because it is not a secret to outsiders the reality of LLC placements of HUD housing, the level of defaults there, the number of people losing their homes, and that taken as a whole, “affordable housing” does not really lie at HUD housing. The big lure of HUD housing has been “quick and easy”, for far too many buyers. That, of course ended with the retirement of The Associates, GreenTree Financial, The CIT Group, GreenPoint Credit, Access Financial, Dynex Financial, National Bank Of Detroit, Bombardier Credit, Origen Financial, Bloomfield Financial, Michigan Nat’l, whoa! My eyes are glazing over. There are many more. The “Quick and Easy” is trying to hang on at LLCLand, we’ll watch with apt wonder for results. See HometownAmerica and ELS for previews of coming events.

What all the above had was lenders who lent, and everyone had a borrower on the other side. We tend to forget in our concern over the lender’s dismay, that behind every one of those loans which defaulted, there was a family who was impacted to some degree, many very badly. Where was the only industry concern stated over their plight? Only Don Glisson, of Triad Financial, an honorable, empathetic man took keyboard in hand and wrote about this in the MHMerch all those many years ago. Not too much concern otherwise by the industry. “They had their chance and screwed it up!” Some chance, with 35% defaults in LLCs with over 700 FICO and far worse in “buy here-default here”.

But who turned gov’t onto these tales of woe against us? Wasn’t us, we just begged for more crumbs from the Fed table, some associations demanding action in rather annoying fashion. That brought about lobbyist who were depised by those whom they lobbied. We didn’t and are unlikely to get much relief from there in the future. No, the clarion call against us was sounded by the Non-profits who deal with the elderly, consumers, and low income tiers. In the past, I have urged the industry to engage the non-profits in rational debate to inquire as to their grievances, and to “partner” with them in going to Congress and elsewhere. Of course, this will mean big concessions by the industry. Have you seen a lot of this activity occurring? Guess I missed it.

In my various assignments with lenders, the GSEs, and MHI, in responses to my many articles and newsletters, and Wall Street visits and investor sessions, it became obvious to me these non-profits were driving the debate, usually behind our back. Not because they are necessarily evil, but because they have far better access to the decision makers. Rightly or wrongly, they dislike all chattel home lending, the lack of industry concern about home warranties, low customer satisfaction, LLC rent increases, and most of all, what they perceive as the very “Bad Deal” HUDCode housing represents. (They ain’t alone. See the Roper Study the industry commisioned in the mid-2000s.) Remember, pereception is reality, and the non-profits were easily able to make that argument.

Here’s a good example of non-profit thinking: declaring all sales transactions of MH, even those which are clearly chattel, to be real estate, like in New Hampshire. The thinking, which I first stumbled on about 7 years ago at a non-profit meeting, is that since NH had the realty law for all MH and HUDs did well financially there, that must be the cause. This position is championed by a law professor at Un Minnesota who is an intelligent, well meaning person. As I told her on the subject, you can label me a young, dashing, atheletic man, but the reality is I am a 68 year old, chunky, arthretic, basket case. No amount of rebranding will change that. I suggested to her that in NH many communities are resident owned, holding down rents, few new LLCs are being developed in a high-cost, high-demand, high-growth housing state, and that might be a good place to look for cause-effect. Sorry, but the actual conditions in NH are far less transferable elsewhere than passing the magic bullet law making chattel directly into realty. Poof, and it is done.

Now, as opposed to Trailerville and their transparent self-serving, endless reqiuests/demands at the foot of the Fed table, and the selfless non-profit servants of the downtrodden masses with their benevelent concerns addressing gov’t, who do you suppose will gain a greater audience? Quick, who? Especially as non-profits are often creatures of gov’t and they are often sleeping with each other, at times even married to each other. Into that fray appears Trailerville, hat in hand, mumbling “affordable housing”, seeking endless exemptions to laws, which laws frankly had many corrections of the situations occuring daily in our industry in mind.

Still, the industry slogs on, focusing forever on SUBPART I, which sets up a complaint process in which the homeowner makes a complaint, and then goes off to watch Oprah as the process grinds its way to determination, months later. Makes sense. “Let me be more like the airline industry than Costco”, says the homebuilders in HUDVille. It costs too much to go out and take care of the customer’s problems. Its too expensive. Of course, there is no expense to the lost 200,000 homes per year presently from the 30 year trendline until year 2001. Or the broken copmanies, careers, lost jobs, failed 401(k)s, retirements, etc. No big deal. Lets do nothing and depend on gov’t to help, you know, like “Duty to Serve”.

Lest you think I am unaware of the grief consumers can visit on you, on my assignment with $149 million in HUDs financed by one bank for two retailers, all of which went bad, I can assure you the borrowers were complicit in the massive fraud. But how do you reconcile $28,000 HUDs on a $12,000 lot with a $3000 carport, with average sales price ABOVE $110,000? Any wonder these loans all went bad? You are living in a subsidized apartment when you are approached by a HUD retailer sales soliciter to “get your own place” and leave the drug dealers and rapists behind, and all you have to do is sign on your “enhanced” credit application, which the retailer makes up and all you do is put an “X” in the signature line. “Our own place!!” I’d have lied on a stack of Bibles to get out of those Hell holes, and so they did. Blame the borrower? I’d start there last.

I hope the industry is able to get relief from the Dodd-Frank provisions it dislikes. My thoughts would be that it is most unlikely to happen for the comments above. What needs to happen is an industry restructuring its failed model of transacting business, and a realization we need friends at gov’t, a lot of which cannot be bought by our paltrey PAC money, but could be strongly enhanced by our enemies, the non-profits, were we to make a real effort there. Can’t go there, Marty, we’d have to make compromises which could weaken our hand, as though we are dealing with a strong hand. Can’t decide whether I should chuckle here or SCREAM! The scream won,…
Open warning: Marty does not really know what he is talking about.

Tony

Spencer,
I agree with your second paragraph. As a successful MHC owner, I believe that comment deserves attention.

The first paragraph raises a common question/concern. Why are MH rates higher? I hope a lender will jump in on this, but let me take a stab at that concern. Some of the factors included, but are not limited to:

1) Lenders generally have a higher servicing costs on an MH loan than a conventional residential house loan.
2) Cost to originate the MH loan is about the same, but the dollar amount is lower on an MH loan than a conv. house mortgage.
3) When repo time comes, lenders take a beating on a HUD MH loan.

On this last point, your second paragraph could – if your vision became a reality – over time bring down MH loan rates.

If lenders get supported as you suggest by retailers and MHCs when a repo occurs, everyone wins. Customers, MH home sellers and lenders. So your second paragraph is important!

Spencer Roane

With the 10-yr. Treasury index and Prime at or below 3%/yr. and
30-yr. fixed-rate financing on site-built homes running about 4%/yr., one has
to wonder why lenders financing manufactured homes are charging about 14%/yr. Loan transactions at those rates are an
accident looking for a place to happen from day one – the few buyers foolish or
desperate enough to pay those rates soon don’t/can’t.

When this industry was thriving, most
manufactured home sales were in communities.
If the buyer defaulted the home could be secured, rehabbed, and resold –
and never moved, never reconnected utilities, never rebuild decks or reinstalled skirting, etc. Cooperative, symbiotic
relationships between community owners and lenders kept repo costs down,
allowing lenders to charge reasonable rates.
Isn’t it time these two segments of our industry begin to work together –
again?